Fitch Affirms MidContinent Express Pipeline at 'BBB'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed its ratings on MidContinent Express Pipeline LLC (MEP) as follows:

--Issuer Default Rating (IDR) at 'BBB';

--Senior Unsecured debt at 'BBB';

--Short-term IDR at 'F2'.

The Rating Outlook is Stable.

MEP's ratings reflect the cash flow stability of a single asset Federal Energy Regulatory Commission regulated pipeline that is supported by long-term contracts with a diverse set of counterparties with improving credit profiles. The ratings consider that in the longer term MEP may face re-contracting risk due the dynamic nature of natural gas supply and demand in the United States. However, the long-term nature of MEP's current contracts and MEP's status as the low cost regional transporter should provide it a meaningful competitive advantage in re-contracting for its capacity.

Key Rating Drivers

Cash Flow and Earnings Stability: MEP's capacity is fully subscribed under long-term ship or pay contracts, which provide a high amount of revenue and cash flow certainty and remove volumetric risk. Average contract life is eight years. A fuel tracker mechanism largely mitigates commodity price exposure for MEP.

Supply Diversity & Strong Connectivity: The pipeline has access to several high growth shale basins including Barnett, Bossier, Woodford and Haynesville. While the long-term prospects for shale gas production remain strong, the current low price environment exposes pipeline operators to greater risks as producers reduce rig counts to cut supply. The risk for MEP is largely mitigated by the nature of its contractual support and also through Fitch's belief unconventional shale gas will continue to be a low cost and growing incremental source of U.S. gas supply. MEP's competitive position is strong given its high number of receipt points which provide supply diversity, as well as its ability to deliver gas to various geographic markets through extensive interconnections with 10 large long haul pipes to the Northeast, Southeast, Mid-Atlantic and Midwest.

Counter Party Exposure: The lower ratings of several key shippers, including Chesapeake Energy Corp. (CHK; rated 'BB', Outlook Positive by Fitch) and Newfield Exploration Company (NFX; rated 'BB+', Outlook Positive by Fitch), expose MEP to counterparty performance risk especially in a low gas price environment. However, in its analysis Fitch considered that the counterparties are each primary producers in their respective basins. Additionally, as drilling in shale formations generates high returns for producers and many land lease agreements require the producers to continue drilling to hold the lease, it is unlikely that during a credit event, the producers would cease gas shipments out of shale basins in a credit event, partially mitigating counterparty risk for MEP. Fitch also notes that on a consolidated basis shipper credit quality has improved due to the acquisition of XTO Energy, which is one of MEP's largest counterparties, by Exxon Mobil (IDR: AAA; Outlook Stable by Fitch) as well as positive Outlooks on both CHK and NFX.

Re-contracting Risk: An additional longer-term credit concern is centered on re-contracting risk associated with MEP's ability to renew its expiring capacity reservation contracts at economically profitable rates as they expire. Current supply and demand favor MEP, with growing production in its supply and increasing demand from electric generation additions. However, given the ever changing nature of the supply/demand dynamic for natural gas in the United States, Fitch believes that it is too soon to accurately evaluate re-contracting risk but recognizes that the pipeline could face re-contracting issues in about eight or nine years.

Solid Metrics: Fitch estimates annualized EBITDA of approximately $200 million per year including expansion projects, which were completed in June 2010. As a limited liability company MEP pays no income taxes, and given low sustaining capital needs, estimated to be 1% of EBITDA, free cash flow is expected to be strong at approximately $150 million-$155 million per year. While Fitch assumes all excess cash flow will be distributed to sponsors, MEP currently has access to a $75 million credit facility to support liquidity needs should they arise. Fitch estimates 2011 debt/EBITDA of 4.0 times (x) and EBITDA interest coverage of 4.1x.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 12 2011);

--'Short term Ratings Criteria for Non-Financial Corporates' (Aug. 12 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Short-Term Ratings Criteria for Non-Financial Corporate

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647249

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